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Unformatted text preview: Chapter 14 The Economics of Climate Change Content: The Impacts of Climate Change on Agriculture How Climate Change Impacts Should Be Addressed Policies to Delay and Dampen Climate Change The Kyoto Protocol The Feasibility and Management of Sink Activities Obstacles to Kyoto Protocol and Carbon Trading Conclusions The Impacts of Climate Change on Agriculture Results of economic studies depend on scientific knowledge. Scientific uncertainties =&gt; economic impact uncertainties. There are several lines of modeling. They differ in:-Incorporation of uncertainty-Incorporation of variability and spatial heterogeneity. Modeling Approach Suppose we have two crops, a warm climate crop and cold climate crop, and we consider the Northern Hemisphere in Figure 1 where we depict profits per acre under the two crops before and after climate change. 2 Let ! measure the distance from the North Pole. Before climate change, the warm crop was grown from b1 to a1* and the cold crop from a1* to a1. After climate change, the warm crop is grown from b2 to a2* and the cold crop from a2* to a2. Obviously, land between b1 to b2 will be deserted and land between a1 to a2 will be settled. There will be both gains and losses in yield and profits, and it is not clear whether the overall effect of climate change will be negative. One has to take into account the other effects: Fertilization effect: Higher levels of carbon will increase yield. Daylight effect: Moving north will reduce exposure to the sun and reduce yield. Pest effect: Warmer climate will lead to northward movement of pest and reduce yield. Water effect: Climate change may lead to earlier snowmelt and flooding. Protein effect: Increase in carbon will lead to higher yields but less protein production. Settlement cost effect: Climate change will require reallocation and settlement cost, from a1 to a2 and from a1* to a2*. All these effects will have to be taken into account in assessing the impact of climate change. In addition, geography matters. A country that has more land in the north than in the south will likely gain from climate change, while the country that has more land in the south than in the north will lose from climate change. Several models have been developed to assess the impact of climate change, and they are discussed below. Hedonic Price Models (Mendelsohn, AER). Premise: Impacts of climate change will be reflected in asset values. Current asset prices can be used to estimate the price sensitivity of land values to changes in climate parameters. Various assumptions about changes in climate conditions are used to estimate impacts of climate change on land values....
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